Regardless of the angle, one looks at it from, it is not easy to pin down the one thing that makes Southwest Airlines, whose headquarters is in Texas, tick! In fact, there is no one thing that explains the fierce attraction that Southwest Airlines inspires to would-be employees and customers alike to make possible the 3200 daily flights across America. At inception in 1973, the airline started with three jets. It currently operates a fleet composed of five hundred and forty-four Boeing-737 series jets. It is a member of the Fortune 500 companies. The charm at Southwest Airlines includes its “strong employee and customer loyalty” (Grubbs-West 6), its focused leadership, and its compassionate involvement with the community.
Customers enjoy flying with Southwest because it is safe, has the best prices in the industry, and has very good customer service. “It is famous for its low fares which are some 30% lower than those of its major rivals” (Hill & Jones 105). Since 1987, the Department of Transport (DOT) rates Southwestern Airlines as the airline with the lowest ratio of complaints per passenger in the industry. This explains why it topped the American consumer satisfaction Index in 2010 as the best airline. The airline operates six customer support centers across America and remains a leader in the point-to-point flight category. Customer loyalty has propelled the airline to be the number one airline, handling the largest volume of domestic passenger travel. In addition, the airline “is known for its record levels of safety” (Gittel 7)
The employees at Southwest are carefully selected and taken care of because, “its culture is unique and fiercely protected” (Grubbs-West 6). The company hiring policy stresses hiring for attitude and training for skills thereafter. This has ensured that a unique blend of employees joins the Southwest family. Because of a very stimulating working environment, Gittel observes that “Southwest has by far the most productive aircraft and employees of any major U.S. airline” (6). In addition to a unique working environment, the employees own 8% of the company’s stock thanks to a profit-sharing plan. When compared to other airlines, employees at Southwest show a greater degree of knowledge of how their function fits into making the airline profitable. When its profits, they profit too.
Southwest has outstanding corporate leadership. It is also a market leader. What else explains thirty-seven years of straightforward profitability? The bottom line never lies. In a very turbulent industry, the leadership at Southwest has managed to keep the company afloat and satisfy its stakeholders through consistent profitability. Other Fortune 500 companies recognize this leadership genius at Southwest. Otherwise, 66% of them would not have subscribed to SWABIZ. Other facts demonstrate Southwest’s market leadership. It was the first airline to create a homepage on the internet. It was also the launch customer for the Boeing 737-700 in 1997.
A sense of concern for the community and compassion for people are some of the key things that Southwest looks for when hiring new employees. It takes the needs of the community seriously. Its main charity is the Ronald McDonald program. In addition, it sponsors the Southwest Airlines LUV Classic Golf Tourney that has made possible the collection of proceeds of over eleven million dollars for charity. In a further demonstration of Southwest’s commitment to community, Yerkes reports that “The Hearts & Homes Project saw Southwest’s Dallas employees rejuvenating homes in poorer neighborhoods; in Operation Cover-up, San Francisco employees painted over graffiti on public walls and bridges” (49). Whichever way you look at it, Southwest Airlines is the place to work, the airline to fly with, and the best neighbor to have.
References
Grubbs-West, Lorraine. Lessons in loyalty: How Southwest Airline does it-an insider’s View. Dallas: Cornerstone leadership Institute, 2005. Print.
Jones, Gareth, and Hill Charles. Strategic Management Theory: An integrated approach. Ohio: Cengage Learning. 2009. Print.
Gittel, Jody Hoffer. The Southwest Airlines Way: Using the power of relationships to achieve high performance. New York: McGraw-Hill Professional. 2005. Print.
Yerkes, Leslie. Fun Works: creating places where people love to work. California: Berrett-Koehler Publishers. 2007. Print.
Written by Mary Schlangenstein and Dan Hart, the article, Southwest Airlines grounds 79 planes after hole in 737-jet forces emergency landing, analyses a story of the emergency landing of one of the Southwest airlines 737 jets. The 737 jets was forced to take an emergency landing after developing a hole while in flight forcing the company to cancel about 300 flights. Flight 812 was carrying 118 passengers and 5 crews when this problem happened on its route from Phoenix to Sacramento on Friday. The problem occurred when an oxygen mask was forced to deploy after the loss of cabin pressure. The article also looks at a similar case that happened last year in July with a Boeing 737-300 where one passenger and flight attendants were injured. Southwest airline has also started a serious inspection to establish the cause of that incident though from the past cases metal fatigue can be blamed for the problem (Schlangenstein & Hart, 2011).
Analysis
The article presents the actions taken by Southwest Airlines after the emergency landing of Boeing 812. The article gives all the actions that the company has been taken to establish the cause of the problem. It also analyses similar cases that happened in the past such as last July case. Many problems in the airline can only be solved by looking at the past records; for instance, the main problem in the Boeing jet is the engine problem, which is solved with past incidences (Langston, 2011, p.46). However, the author of the article does not present the reaction of the customers who are most affected by this problem. For example, many flights were canceled which affected customers of Southwest airline in many ways. This can add to the problem that is already in the company of delaying customers as Tang and Zimmerman (2009, p.74) claim.
Conclusion
The article analyses the steps taken by Southwest airlines to fix the problem. Presentation of the past incidence helps to address the current problem. Despite all these efforts, the article does not present the views of the customers, which are also very important in solving the problem.
Schlangenstein, M., & Hart, D. (2011). Southwest Airlines grounds 79 planes after hole in 737 jet forces emergency landing. Bloomberg News.
Tang, C. S., & Zimmerman, J. D., (2009). Managing New Product Development and Supply Chain Risks: The Boeing 787 Case. Supply Chain Forum: International Journal, 10 (2), p74-86.
Southwest Airlines is a low-cost airline that operates in the United States and focuses on short, high-traffic flights. Its prospects are currently in question due to a combination of emerging demand issues and challenges to its operational and financial performance. Moreover, the COVID-19 pandemic may exacerbate these problems due to its significant and varied adverse effects, such as the bans on flights and the general economic damage due to lockdown orders. The current circumstances, combined with current trends in aviation and some of Southwest’s practices, namely fuel hedging, can overturn the company’s lengthy trend of profitability. This case study will discuss the growth rates of domestic demand in the United States as well as the airline’s excellent operational performance and potentially risky financial practices.
Main Body of Findings
As a mode of transport, airlines’ traffic growth is subject to the needs of their users and their capability to afford the service. As such, some of the factors described by Profillidis and Botzoris (2018), specifically purchasing power and technological improvements, are relevant because of their significant presence in the U.S. economy and aviation. Fraumeni (2019) was optimistic regarding both the nation’s current prosperity and its prospects, such as the increasing adoption of information technologies, which would motivate Americans to purchase more. Additionally, Kellari et al. (2017) projected significant efficiency improvements in current and future aircraft via the development of more efficient engines without altering the design of the plane, lowering costs and thereby increasing demand through the increased affordability of tickets. These factors appear the favour the United States, as its traffic has grown consistently since the 2008 financial crisis, and favors remained the largest market for airlines in the world (Belobaba et al., 2015).
Figure 1. Enplanement growth history and projection for U.S. carriers (Federal Aviation Administration, 2020).
However, when viewed from an international perspective, concerns may emerge regarding the situation within the United States. Lai et al. (2018) contrasted the 2016 U.S. domestic flight market growth rate in the U.S., which was 3.9%, to that of China, where the same characteristic was at 7.1%. With that said, there is still significant potential in the market, as it was projected by the Federal Aviation Administration (2020) to grow over 50% by 2040. The domestic sphere is particularly important because it constitutes most of U.S. air traffic and because 80% of the tourism in the nation is local rather than international (Graham & Dobruszkes, 2019). As can be seen in Fig. 1, domestic market growth is projected to stabilize at 2% in the future, which is likely the result of the market’s age and saturation. Ison (2007) highlighted how increases in the density of air routes that are served are associated with diminishing returns, as these new routes compete for existing customers more than they create new ones. As such, carriers will generally have to rely on increasing traffic on existing ones.
It should be noted that the framework presented so far does not take into account various potential crises, such as the current COVID-19 situation. Cronrath (2017) discussed the well-documented volatility of the airline industry, which struggles to adjust supply to demand due to its high fixed costs. Moreover, as Gössling et al. (2020) noted, the current COVID-19 pandemic and the associated travel restrictions are already affecting airlines and the economy as a whole, with international traffic projected to decline by 20 to 30%. These losses are in large part the result of flight cancellations, which also affect domestic flights and, therefore, Southwest Airlines. As Vasigh et al. (2013) stated, the growth in air travel demand is closely associated with economic growth, which exacerbates the danger of the current crisis to the aviation industry. As a mostly American company, Southwest Airlines will have to address these concerns as well as any internal issues to survive.
Southwest Airlines’ financial performance in the past can be considered excellent. Throughout the last forty years, the company has consistently remained profitable and grew to become the largest U.S. carrier, valued at approximately $26 billion with 747 aircraft (Brown & Stewart, 2019; Southwest Airlines, 2020). According to Adler (2018), its success is a combination of cost leadership (superiority through having the lowest costs) and a blue ocean strategy (innovation to capture uncontested markets). However, in recent years, its expenses have been growing faster than its revenues, a change that the business claims to be a result of the Boeing 737 MAX scandal (Southwest Airlines, 2020). If this claim is accurate, the decline may be temporary and non-meaningful in the long term.
Southwest Airlines is renowned for its focus on operational performance to create cost savings and foment innovation. It operates as a point-to-point carrier that focuses on high-traffic routes, achieving efficiency through low turnaround times and closely networked operations (Billig & Cook, 2017). Moir and Lohmann (2018) praised Southwest Airlines for being the sole U.S. airline that formulated a strategy, which involves high network density, fleet uniformity and cost leadership, and followed it completely and successfully. Barnes (2018) suggested that the company achieved this success by imitating industries that perform better in some aspects than airlines and innovate for success. With that said, it also compromises on service onboard planes, though in doing so, it has saved costs and increased its market share to one of the largest in the nation (Smith, 2016).
Southwest Airlines may also be more ready for various crises than much of its competition. Dyer et al. (2017) suggested that it remained profitable throughout various downturns because of its high load factor, with up to 79.3% of seats consistently filled on its flights due to the low turnaround times, which were minimized through various speed improvements. The business also has a robust focus on its employees and customers, driving loyalty and improving performance through an emphasis on employee happiness and engagement as well as reliability and low prices (Kraft et al., 2017; Halpern & Graham, 2018). Employees respond with innovations, with MacNeice and Bowen (2016) describing the case of a worker who developed a revolutionary scheduling program at home.
With that said, as Vasigh (2017) indicated, while the company may be better prepared to deal with the various dangers to the aviation industry than many of its competitors, it is still vulnerable to them. Southwest Airlines (2020) expressed concern regarding the current COVID-19 crisis, noting that the company is significantly underperforming compared to projections. A massive decline in stock price has resulted from the crisis, as Fig. 1 shows. Fuel, which is particularly relevant to airlines per Wensveen (2016), is an especially significant source of concern, as the company spent $4.3 billion, or 22.3% of its total operating expenses, on it in 2019 (Southwest Airlines, 2020). Giachetti (2016) stated that Southwest Airlines engages in aggressive fuel hedging due to expectations that oil prices will continue to rise. If, as in the current situation, oil prices fall considerably, the company can sustain a significant loss on its investment.
Figure 2. Southwest Airlines’ stock price graph for the past year (Southwest Airlines Co. (LUV), 2020).
Recommendations
First, it is necessary to discuss fuel price hedging, as it has significant pros and cons. Gajjala and Dafir (2016) identified benefits such as a reduction in distress costs and improved capital conservation as well as a lowering of debt costs. However, Chatterjea and Jarrow (2019) provide the example of Southwest Airlines not saving $535 million, or 15.9% of its total fuel costs, while other companies recorded losses between $366 million (for Delta Air Lines) and €905 million (for Lufthansa), as a result of fuel price hedging. Vasigh (2017) attributed these losses to excessive usage of the practice, which leaves airlines vulnerable to the opposite price extreme. Hedging is still highly beneficial to the stability of an airline, but Southwest Airlines should reduce the percentage of the fuel that it hedges to avoid massive losses.
A merger may be the most promising solution for the improvement of the company’s stability. Tabacco (2016) described Southwest Airlines’ 2011 acquisition of AirTran, a smaller low-cost carrier. The practice’s primary benefit is the economy of scale that is created as a result, enabling increased efficiencies and cost savings (Iatrou & Oretti, 2016). However, as Lelieur (2017) warned, long-term planning before the act is necessary to secure the majority of the benefits on schedule. As such, Southwest Airlines should monitor potential crises and begin planning a merger immediately if it expects difficulties in the foreseeable future.
In the event of long-term success, Southwest Airlines should shift its concern to the saturation of the market. Panibratov (2017) proposed international expansion as a strategy that is frequently used by businesses in search of a new market. Billig and Cook (2017) predicted that developing regions would be responsible for 70% of future air traffic growth, as citizens of nations such as India and China move up into the middle class and become able to afford flights. Southwest Airlines’ operational excellence can allow it to overcome emerging competition (Voigt et al., 2017). As such, a venture to expand into these new regions, possibly through acquisition and reorganization of an existing LCC, as was the case with AirTran, can prove highly beneficial and profitable.
Conclusion
Although Southwest Airlines’ operational performance is excellent, the company’s outlook identifies several significant issues. Demand in the United States is likely slowing down significantly due to market saturation. Many of the factors that create losses, such as the Boeing 737-MAX grounding and the COVID-19 pandemic, are beyond Southwest’s control. However, some of the practices that it engages in, particularly fuel hedging, have also led to high additional costs as a result of their excessive and risky applications. As such, it should limit its amounts of hedging and consider options to combat depressions and guarantee future growth. Mergers appear to be the most feasible solution to the first issue, improving the resilience of the entities that engage in it. To secure long-term growth, Southwest may turn its attention to developing nations such as China and India once its current situation stabilizes.
References
Adler, R. W. (2018). Strategic performance management: Accounting for organizational control. Taylor & Francis.
Barnes, D. (2018). Operations management. Macmillan International Higher Education.
Belobaba, P., Odoni, A., & Barnhart, C. (2015). The global airline industry (2nd ed.). Wiley.
Billig, B., & Cook, G. N. (2017). Airline operations and management: A management textbook. Taylor & Francis.
Brown, K. G., & Stewart, G. L. (2019). Human resource management. Wiley.
Chatterjea, A., & Jarrow, R. A. (2019). Introduction to derivative securities, financial markets, and risk management (2nd ed.). World Scientific Publishing Company.
Cronrath, E. (2017). The airline profit cycle: A system analysis of airline industry dynamics. Taylor & Francis.
Dyer, J. H., Godfrey, P., Bryce, D., & Jensen, R. (2017). Strategic management: Concepts and cases (2nd ed.). Wiley.
Federal Aviation Administration. (2020). FAA aerospace forecasts: Fiscal years 2020-2040. Web.
Fraumeni, B. M. (Ed.). (2019). Measuring economic growth and productivity: Foundations, KLEMS production models, and extensions. Elsevier Science.
Gajjala, V. N., & Dafir, S. M. (2016). Fuel hedging and risk management: Strategies for airlines, shippers and other consumers. Wiley.
Giachetti, R. E. (2016). Design of enterprise systems: Theory, architecture, and methods. CRC Press.
Kraft, P., Stahlhofer, N. J., & Schmidkonz, C. (2017). Conscious business in Germany: Assessing the current situation and creating an outlook for a new paradigm. Springer International Publishing.
Lai, K. K., Zheng, Y., & Wang, S. (2018). Forecasting air travel demand: Looking at China. Taylor & Francis.
Lelieur, I. (2017). Law and policy of substantial ownership and effective control of airlines: Prospects for change. Taylor & Francis.
MacNeice, B., & Bowen, J. (2016). Powerhouse: Insider accounts into the world’s top high-performanceorganizationss. Kogan Page.
Moir, L., & Lohmann, G. (2018). A quantitative means of comparing competitive advantage among airlines with heterogeneous business models: Analysis of US airlines. Journal of Air Transport Management, 69, 72-82.
Panibratov, A. (2017). International strategy of emerging market firms: Absorbing global knowledge and building competitive advantage. Taylor & Francis.
Profillidis, V., & Botzoris, G. (2018). Modeling of transport demand: Analyzing, calculating, and forecasting transport demand. Elsevier Science.
Smith, T. J. (2016). Pricing done right: The pricing framework proven successful by the world’s most profitable companies. Wiley.
Tabacco, G. A. (2016). Airline economics: An empirical analysis of market structure and competition in the US airline industry. Springer International Publishing.
Vasigh, B. (2017). Foundations of airline finance: Methodology and practice. Taylor & Francis.
Vasigh, B., Fleming, K., & Tacker, T. (2013). Introduction to air transport economics (3rd ed.). Ashgate Published Limited.
Voigt, K., Michl, K., & Buliga, O. (2017). Business model pioneers: How innovators successfully implement new business models. Springer International Publishing.
Wensveen, J. (2016). Air transportation: A management perspective (8th ed.). Taylor & Francis.
Does Southwest Airlines use motivation and psychology in their marketing strategy?
The CEO of Southwest Airlines admits that employees turn out to be the greatest strength and the main competitive advantage of the company (“About Southwest”, 2011). This is why taking about motivation and psychology in the marketing strategy of Southwest Airlines, it is necessary to admit the role of these factors is considerable indeed. One of the first fundamental questions posed while motivating people is all about the causes of human behavior (Reeve, 2009). And the company finds it important to create the conditions under which employees are more involved in work and lead to successful results for the company.
Gittell (2005) mentions that shared goals usually motivate people to do their best to move beyond day by day. If employees have their own goals and realize that their activities are appreciated by the company, they are ready to create the best working conditions and improve their marketing strategies. The point is that company’s goal is not only to attract the attention of new employees by also to improve the retention of those who have been working for several years. The thing that motivates the workforce is the possibility to get 10% of the company’s stock. This is why experienced workers can evaluate the conditions offered by the company.
Does Southwest Airlines allow for “rewards” to be given to employees that provide excellent services as a way to get the less “motivated” employees motivated?
The vast majority of workers in the company are aware of the rewards which are possible for their performance. There is a certain amount of exceptional work, and the company recognizes those who perform the required amounts of work regarding personal expectations. Using providing such rewards, Southwest Airlines continues maintaining loyalty and a high level of motivation. People are satisfied with the conditions they have to work under.
There is no certain idea to give rewards just to motivate people to work better. The rewards for Southwest Airlines’ employees turn out to be a kind of appreciation for help, imagination, and efforts that are spent on improving the company. The company does not want to admit the fact that rewards help to motivate “less motivated” workers, and the chosen approach still works and makes all employees understand that the more ideas and services they offer, the better their rewards can be.
What classes are offered to employees, from the top of the organization to the lowest position, to maintain motivation and positive encouragement of the company?
One of the most captivating things about the company is that all employees and their families get the right to free flight. However, the company does not define such flights as a kind of benefit for workers but underlines that “it can be taken away if it is misused” (Lauer, 2010, p. 123). This is why it does not matter what position an employee posses in the company, the truth is that free flights are available and people are welcome to use them.
To maintain motivation, the company has several discounts and programs to obtain better conditions for flying. For example, employees may earn four passes that are based on hours of work to provide their families and friends with flight privileges. Such a possibility encourages people a lot. Motivation is based on human behavior (Reeve, 2009), and the company makes use of this concept to prove that a little bit of inspiration and rewards for employees will help to achieve the best results and become the leading company in the world as well as a successful example of how marketing strategies and respect may help.
Reference List
“About Southwest.” (2011). Southwest.com. Web.
Gittell, J.H. (2005). The Southwest Airlines Way: Using the power of relationships to achieve high performance. New York: McGraw-Hill Professional.
Lauer, C. (2010). Southwest Airlines. Santa-Barbara: ABC-CLIO.
Reeve, J. (2009). Understanding motivation and emotion. New York: Wiley.
The documentary, “The American Southwest: Are We Running Dry?” discusses the looming water crisis that poses detrimental effects on the inhabitants of Southwest America. The documentary highlights the connection between climatic change, diminishing water resources, and encroachment of natural habitats due to overdevelopment. Rapid population growth has placed considerable strain on America’s most important natural resource with dry persistence conditions creating an excessive demand for the supply of clean water. Despite the existence of evidence showing increasing scarcity of water, there have been little efforts directed towards reversing the trend unlike the case of natural resources such as oil whose scarcity has triggered the adoption of numerous conservation measures. The lack of concern by the public and government is disturbing because water scarcity is a time bomb whose consequences are more catastrophic than the drying of oil reserves.
It is saddening that people are not taking initiatives to conserve water even though there are no alternatives for water, unlike fossil fuels. The documentary shows that the people facing the greatest risk of water scarcity are minority communities such as the Indian communities in Southwest (The American Southwest). However, water crises will become a global phenomenon due to the inference of the hydrological cycle, which will lead to interrupted snowmelts, rain, and drying of rivers. Diminishing water levels in major catchment areas such as the Colorado River will not only affect the adjacent communities but also hamper access to clean water by Americans across a wider region, including areas such as Los Angeles.
The Indian communities are already experiencing water rationing as evident by the fact that they can only access about 25 gallons of water compared to the 100 gallons used by an average American family. Scarcity of water has far-reaching effects, especially in matters of public and environmental hazards. Awareness regarding appropriate land planning and mitigation of the effects of climatic change emerge as key recommendations whose implementation will ensure the preservation of catchment areas such as Lake Powell, Lake Mead, and the Rio Grande without which the cities in the American Southwest will plunge into a disaster.
The documentary highlights that despite the harsh climate in the Southwest, there is the hope of addressing the water demands of the expanding population with the adoption of appropriate policies. The pragmatic shift towards water conservation should become a major initiative by the government, considering its authority to consolidate resource and spearhead the implementation of national water policy. Changing how authorities allocate water will promote the acceptance of campaigns on water conservation by the public. The status of surface water is an indicator of the condition of groundwater, which can help to predict the future of water availability and influence both the short-term and long-term interventions.
Coordination between departments involved in land planning and management of water catchment areas will greatly reduce encroachment and diversion of waterways, which increase the implications of dry conditions. The documentary provides the viewer with insights on the future of water crisis, considering that the conditions exhibited in the American Southwest are likely to develop in various parts of the world. The documentary provides a scope for preparedness and mitigation of chaos and disasters associated with water scarcity, which governments can rely upon to maintain and preserve the crucial natural resource.
Work Cited
The American Southwest. Dir. Jim Thebaut. Perf. Jane Seymour. Chronicles Group, 2008. DVD.
According to Business Week (2008), Southwest Airlines is a passenger airline that provides scheduled air transport in the United States. The company also sells credit to business partners for instance hotels, telecommunication companies, credit card companies and car rental agencies.
The Southwest Airline Company was founded in 1967 under the initial name of Air Southwest which was later changed to Southwest Airlines in the early 1970s.
The company’s headquarters are in Dallas, Texas with a large focus city at McCarran International Airport in Las Vegas. The number of passengers carried domestically, annually is the highest in the United States and in the world over.
By revenue, Southwest airlines are the sixth-largest airline in the United States which makes it one of the most profitable airlines in the world. This is what led to Southwest Airlines posted a profit for the thirty-fifth consecutive year in the month of January 2008. It also maintains the fifth largest passenger fleet of aircraft amongst all the commercial airlines globally (Freiberg, 1996).
Southwest Airlines uses short-haul routes and point-to-point service where their flights operate from one city to the other. The airline complements its services by increasing the number of medium to long-haul routes which include transcontinental service.
There are a number of factors to which the airlines’ success can be attributed. Its approaches when compared to those used by other airlines are quite different. The method of payment of the crew they apply is by trips. Their crew is one of the best paid in the industry. This must contribute to the high quality of service output. The airline does not assign seats to any particular passengers. Instead, there is just one class of travel for all the passengers. In an effort to make traveling more relaxing for their customers, the airlines usually use the less congested airports. With a combination of low airfares, the airline has been able to attract very high numbers of passengers. The Fortune Magazine once referred to the airline as “the hottest thing in the sky” (Serwer, 2004).
According to Freiberg (1996), Southwest airlines’ profitability has not always been stable; the company had to deal with financial constraints, especially in the early 1970s. This can be said to be what led the company to adopt financial techniques so as to first, boost its profitability then, deal with some fuel complications which rose or were expected to rise within the course of the airline’s operations. The fuel cost containment was later what came to be established as one of the major reasons why the company succeeded in maintaining its profit margins. The fuel cost containment strategy was implemented by the airline in order to ensure future fuel costs fluctuations are not only predicted but are appropriately planned for in advance. The strategy was called ‘The Hedging Strategy’ and it enabled the airline to secure fuel at considerably low costs (Banstettor, 2002).
Southwest Airlines is the only airline that maintains an investment-grade rating on the debts incurred which in the airline industry is a great accomplishment. The company’s officials point out that this is part of the company’s culture (Serwer, 2004).
Southwest Airlines’ financial developments within a four-year time period show that the gross profit of the company as of 2004 was US$ 1,760 million but by the year 2007 the same had increased to an amount of US$ 2,505 million. The total revenue as stated in the income statement of the year 2007 was a total amount of US$ 9,161 million compared to that of 2004 when the total revenue was US$ 6,530. The Net Income for the year 2007 was a total of US$ 645 as compared to the 2004 amount of US$ 215 (Reuters).
Ratio Analysis
The different ratios are; The Gross Margin ratio which is the five-year average for the company is 28.37 while the five-year average gross margin ratio for the industry is 23.11. This is an indication that Southwest airlines are performing above average in terms of profitability in the industry.
The Net profit margin for the company is 5.86 while for the industry the ratio was 1.95. This shows that the company is more profitable than most of the other companies in the industry. The Quick ratio for the company is 1.03 while the same for the industry is 0.92. This is an indication of the company’s high liquidity. The Current Ratio (MRQ) for the company is 1.07 while that for the industry is 1.03.
All the above comparisons of Southwest airlines’ financial ratios with those of the airlines industry indicate that it is generally doing better financially than most of the other airlines in the same industry.
According to the business Dictionary.com, a perfect competition market is a hypothetical (does not really exist in real life) free market with the following characteristics:
the number of buyers and sellers is so large such that there is no single buyer or seller who can be able to determine or control the prices in the market.
In the market, all the buyers’ and sellers’ main objective is to make the biggest profits.
Entry and exit into the market for the buyers and sellers is not restricted in any way.
There is freely available abundant information to all the buyers and sellers and sellers concerning the availability, costs and quality of the various goods and services on sale in the market.
The goods or service which are in the market are substitutable due to the common characteristics that they have. (Business Dictionary.com)
In the united states, the airline industry may be described as such. This is due to the fact that there are billions people who travel annually and also numerous airlines. The United States is the biggest single market in the world and in 1996 it accounted for 41% of the total scheduled travels internationally (the Airline industry, 2000).
The pricing policy implemented by southwest airlines is one price fits all. For many years they have made the prices for their tickets to be uniform without any bias on basis of first, business or economy class as many airlines usually do. on top of this, the airlines has always kept its prices lower than the other airlines and this has helped it keep a large chunk of the air travel market with big profits yearly, but of late this has tended to change.(Reuters, 2008)
In mid this year, the oil prices had risen very high and in return had made the fuel prices to also rise. Since in the airline industry, the most used input is the jet fuel, it determines the prices of the tickets which the airlines can charge. With the increases in its price, many airlines had to also increase their prices.
Apart from the costs of inputs, that is the fuel, there area also some other factors which have affected and necessitated the increase in the prices of airline tickets. There are government regulations, for example at LaGuardia airport where the government intends to control the number of planes landing and taking off in a bid to control congestion (cheapflightss.com). The credit crisis in the united states has also contributed to affecting prices.
The input costs for the airlines industry mainly is fuel which is being concentrated on in this case. The cost of fuel is not necessarily affected by the market structure but there are a variety of factors which influence it. Some of these are: the cost of crude oil, the persistent increase in the demand for oil internationally, uncertainty of oil supply, taxation and also supply and demand imbalances.(caltex, 2006).
In a situation where the costs of fuel rises, Southwest airlines does not necessarily pass all of the increase in costs over to the consumers, their customers. This is unlike other airline companies whose prices are immediately affected by the increase in fuel prices. Southwest airlines has been able to hedge itself against fuel price increases by fuel hedging. This it did by locking in oil prices years in advance. (Denverpost.com).
Southwest Airlines is an American low-cost air company founded in 1967 by Rollin King and Herb Kelleher. The main idea of the creators was to make an airline that has low prices and works fast and efficiently. Nowadays, the company has expanded all over the United States and is having international flights. Southwest Airlines uses only Boeing 737 as the aircraft which helped reduce the costs for its maintenance. Throughout the history of the firm, it has always upgraded its aircraft and has ordered new versions of the Boeing 737. During the 1980s Southwest Airlines adhered to the idea of a low-cost ticket company and offered Senior Citizens programs allowing elderly Americans to buy airplane tickets only for $25 one-way.
Within 9 years (from 1990 to 1999) the aircraft number increased from 100 to 300. In 2006 the company got a win with the Wright Amendment Reform Act. This allowed Southwest Airlines to sell tickets and offer interconnecting flights from Dallas-Love Airport, the company’s major bases. In 2010 it purchased the AirTran Airways and extended its international routes. Nowadays, Southwest Airlines is one of the most popular air companies in the United States and constantly transports passengers both with domestic and intercontinental flights. The total equity of the company was $9.853 billion by 2018, and it keeps growing within time. Investing in Southwest Airlines stock is beneficial as customers will always choose a low-cost company and, withing the growth of the market, the stock price of Southwest will relatively increase.
Southwest Airlines has a fundamental business model for a low-cost carrier with a constantly growing network and smart pricing behavior. An average customer will always choose a budget price for a ticket along with trust in the company that exists several decades. That means a demand for a low-cost carrier will remain high, and the value of Southwest on the market will never lose its relevance comparing to full-service airlines.
Moreover, Southwest remains a leader in pricing behavior affecting participants of the market to respond to its actions and set competitive prices. An empirical study by Asahi and Murakami (2017) assessed synchronized demand and price calculations using airline industry data for the fourth quarter of 2003-2010. The results showed that Southwest did not change its price strategic plan within time and also influenced the rivals’ behaviors. Table 1 below shows estimated results from the study of Southwest Airlines’ price changes and its rivals’ pricing behavior after Southwest entered the market.
Table 1. Estimated Results by an Iterative 3SLS Analyzing Changes in Pricing Behavior of Southwest Airlines and Its Rivals After Southwest’s Entry. (Asahi & Murakami, 2017, p.4)
Southwest shows a smart strategy during market plunges which gives a positive impact on its sustainability and survival on the market. For instance, in 2008, along with rising fuel prices, Southwest created a hedging fuel approach that saved millions on an annual basis. According to Cote (2018), Southwest Airlines had long-term contracts to purchase its fuels at the equivalent of $51 for a barrel in 2009.
The value of those hedges climbed up as oil raced above the $91-a-barrel mark, and they are now worth more than $2 billion. With a flexible strategy to maintain the crisis and the market drops, the company deserves respect and special attention in purchasing its stock as it shows high sustainability and persistence on the market. Along with dominative position in setting costs and leadership in price behavior, Southwest remains actual in the airline industry of the United States.
With a low-price strategy, buying stock from Southwest is profitable now as it has a relevant tendency to grow within the development of the market. Price versus value might seem confusing when deciding to buy stock; however, it is obvious that these two categories have a separate meaning. If the price of the stock goes down for some economic reasons, the value can still be high in the long-term perspective.
For instance, figure 1 below shows the decrease in the stock price of Southwest Airlines in February 2021 and June 2021. These changes are more likely connected to the spread of COVID-19 infection and the delta-mutation that caused the third peak of contamination in June 2021. However, after the pandemic, the economy will grow again that will consequently cause a rise in the stock market. The value of the stock is still high and will remain high even though the price varies within different issues. A low-cost company with a decent strategy to fight a respectable place in the airline industry will remain valuable and highly demanded. It has higher chances to stay in the market for many decades as it shows flexibility and smart policy even throughout economic fall. According to Papke (2021), the greatest returns are from companies that capture value from low-cost business strategies.
It is hard to disagree with Papke as Southwest Airlines along with that, shows high sustainability and corporate social responsibility in business leading. Observing the static entry game model by Ren (2021), the results show that Southwest has a remarkable and negative impact on the payoffs of other carriers. Southwest’s nonstop presence enforces more descendant stress on opponents’ profits than its attaching presence. That means the leadership position of Southwest remains up-to-date and influences its competitors on the market. With a constantly growing net, expanding directions, having a sustainable price behavior, Southwest Airlines is worth investing in.
Figure 1. Daily prices of Southwest Airlines’ stock. (StockCharts, 2021).
Thus, investing in Southwest Airlines is beneficial as it is a sustainable business with a firm trade strategy and a leadership position on the market. With the growth of the economy, the value of the stock will correlatively grow. Risks in investing in this company are minimized as it shows a respectable tendency to survive during market plunges and flexibility while leading a business strategy. The low-cost carrier is also actual on the market comparing to the full-service airlines. The most profitable approach in investment in Southwest will be a long-term investment that can bring a higher dividend income.
The COVID-19 pandemic will eventually end which will consequently cause a rise in the economy and an increase in stock price. Now, in a low-cost stock moment, it is the most profitable period for investment as it is the weakest time for economy and air company policy because of border restrictions. The cites such as finance.yahoo.com and stockcharts.com can show a wider picture of Southwest Airlines’ stock value and its development within time.
From my perspective, Rollin King and Herb Kelleher, as the founders of the Southwest, created a beneficial idea of a low-cost carrier that eventually became a successful business. The initial goal was aiming to give Americans the opportunity to take an airplane ticket worth less than taking the other way of transportation on the same distance. With developing this idea, the company expanded various routes all over the United States and now is providing passengers with international flights.
References
Asahi, R., & Murakami, H. (2017). Effects of Southwest Airlines’ entry and airport dominance. Journal of Air Transport Management, 64, 86–90. Web.
Cote, R. (2018). Leadership analysis: Southwest Airlines-Herb Kelleher, CEO. Journal of Leadership, Accountability & Ethics, 15(1), 113-124.
Papke, B. (2021). The Evolution of Investing. Finance Undergraduate Honors Theses, 62, 1-20. Web.
The southwest airline, which was founded by Herb Keller the then CEO in June 1971, has been one of the most profitable businesses since it commenced its operations.
It was ranked among the top admired airlines in the past as per a survey conducted by the American customer satisfaction index from 1997 to 2001 in terms of satisfactory customer service. The southwest airlines applied a shorthaul approach, which entailed a 55 minutes flight time. It also paid its crews by each trip and used the less congested airports for its operations.
In addition, the southwest pilots were not members of a national union that limited the number of hours a pilot could fly an airplane. The duration between landing of a plane and its takeoff was about 20 minutes, in which four ground crew and two gate agents were required, as opposed to the united airlines, which required approximately 30 minutes with an additional ground crew of 12 and 3 gate agents.
The CEO’s philosophy of putting employees’ needs first contributed to satisfying the employees, who resulted to being dedicated and motivated, thus working towards satisfying the customers’ needs. When customers are pleased with the services offered, they definitely come back for more services (Achtmeyer, 2002). In June 2010, Southwest Airline celebrated 40 years of service, which is remarkable.
Industry Analysis of Southwest Airlines
Southwest Airline has been constantly profitable, as opposed to other airlines, some of which have been declared bankrupt. Its reputation hails from low-affordable fares, timely flights, and an attractive corporate culture. Nevertheless, each business is influenced by Michael porter’s five forces, which include; “supplier power, buyer power, threats of substitutes, degree of rivalry and threats of new entrants” (Orcullo, 2007, p. 49).
Rivalry
A competitive market is always associated with rivalry, because of market concentration. As a result, each airline fights to achieve a competitive advantage. The southwest Airlines offer low fares as one of their competition strategies and offers many on-time flights to its customers. Price wars are evident in the airline industry as a means of attracting customers; for instance, Southwest Airlines offers low cost fares that are readily available on the internet.
In addition, Southwest Airline has managed to beat Delta Airlines in terms of fares, since the latter’s fares are quiet high. In addition, Delta Airlines has outweighed Southwest Airlines due to the acquiring of Northwest Airlines, hence capable of offering passenger access to all cities in the United States and across all corners of the world.
United Airlines recently merged with Continental, posing as a threat to the Southwest Airlines. Nevertheless, Southwest Airline knows that low fares alone cannot guarantee a competitive advantage; therefore, it pays its pilots handsomely, 40% higher as compared to other airlines, hence motivating the pilots to fly at least an extra hour as opposed to other airlines (Mouawad, 2010).
In addition, Southwest Airline does not charge for the customer flight changes, therefore, customers are easily lured. In contrast, Delta Airline distributes majority of its tickets to travel agents, thus, costs are incurred, which result to rise in the ticket prices for customers. However, Southwest Airline creates online ticket booking at low prices, a strategy that has proved to be a reliable over the years.
Threat of Entry
Due to the deregulation of airline industries, new airlines may emerge, to avoid some airlines being declared bankrupt because of stiff competition. Southwest Airline has been faced by a lot of threat from the emerging airlines that have adopted the low cost and quality customer care services; for instance the Jet Blue Airways, hence being a challenge to the Southwest Airline in fear of loosing customers to the growing airline.
Threats of Substitutes
Most of the services offered by airlines are almost similar; hence, a customer may be tempted to try out another airline with similar services. The airline industry faces threat from other means of transportation, for instance, buses or trains. This may be relevant in short distances, however, in long overseas destinations, most people prefer the airlines, as they are fast.
The southwest airline is exposed to the threat of the substitutes offered by the rival airlines, for instance, some destinations traveled by Delta Airlines are also covered by Southwest Airlines – New York, Miami and other countries. In addition, Jet Blue Airway has proved to be a major threat in terms of the low fare strategy, whereby, it offers approximately low fares, as it is the case with the southwest airline.
The Suppliers Bargaining Power
Due to the competitive airline industry, airplane manufactures like Boeing and Airbus have a high bargaining power due to the switching costs incurred when changing airplane models. However, Southwest Airline has been using one kind of airplane, Boeing 737, hence saving a lot of cash in terms of maintenance and training of engineers. This measure gives Boeing manufactures a high bargaining power over the Southwest Airline, as it only uses one plane model.
However, the recent remarks made by Kelly Gary, the current CEO of Southwest Airline, on a possible shift from the Boeing manufactures to other manufactures with fuel-efficient aircraft could render Boeing manufacturer’s bargaining power to decrease. Nevertheless, Boeing manufactures may have a low bargaining power over its other customers like Jet Blue Airways, since it is not as enormous as the southwest airlines.
Buyer Bargaining Power
Southwest Airline offer friendly fares to their customers as a way of attracting more customers. However, there are a number of services that are spiced up to make the passenger comfortable – bags are not charged, pets accompanied by a passenger are allowed in the plane, and pet cabins are provided.
Moreover, change of flights is not charged, therefore guaranteeing customers flexibility. These strategies give customers a bargaining power, as they are able to choose from any affordable traveling classes, and have the freedom of bringing their pets along.
Conclusion
Since its operations in 1971, Southwest Airline has proven to be effective and reliable, in terms of customer service, flexibility, and productivity. The adopted strategy of cost leadership and product differentiation has led to a competitive advantage.
Despite the short trips it made in its early years, those trips were accompanied by a large number of passengers, and the flights were always on time. Providing relative low fares to its customers and paying its employee handsomely has contributed to loyalty from both the customers and employees. In addition, Southwest Airline has a unique culture, which involves allowing its attendants engaging the passengers in songs and games.
SWOT analysis evaluates a firm’s strengths, weaknesses, opportunities, and threats. Strengths place a firm at an advantage over rival firms, while weaknesses act as disadvantages to the firm when compared to others.
Opportunities are chances that present themselves to the company and when the company grabs them, it stands a chance of making more profits. Threats are associated with those factors that can cause trouble for a company such as stiff competition (Hayward, 2002, p141). Southwest Airline is one of the low-cost airlines and a leader in terms of the number of passengers who board it annually.
SWOT Analysis; Southwest Airlines
Opportunities
Southwest Airline has been in operation for along time, and just like other businesses, it has been faced by both challenges and opportunities, which has made it stronger to date. First, the mission statement is simply dedicated to quality customer service, which is attained via warmth, friendliness, pride, and company’s spirit. This has proved to be true as the airline operates with the interest of a customer in mind.
The airline has been associated with a number of strengths; first, it has always been the best low-cost airline in term of fares for passengers. Therefore, most passengers have preferred it.
The airline has always maximized on internet booking, thus making it easier for its customers, and acting as a way of marketing itself. The airline pays its pilots handsomely compared to other airlines, hence motivating the pilots to fly at least an extra hour as opposed to other airlines (Mouawad, 2010). This has made it possible for the airline to make almost 3,100 flights in a day.
It is evident that the Southwest Airline has its employee’s interest at heart, thus proving difficult for them to be poached by other airlines. In addition, the airline has a unique culture, that of entertaining its passengers, thus encouraging them to fly with Southwest again.
The well utilization of Boeing 737 has made it unique as it only uses this model of airplane. Its main concentration on short trips has yielded to cutting of costs, thus benefited the airline. Nevertheless, the airline has been using one type of airplane, Boeing 737 that incurs minimum maintaining expenses.
Weaknesses
The airline is associated with a number of weaknesses. First, it is limited to sixty cities. This is a major challenge for the airline due to the mergers formed by United Airline and Continental Airline, thus being capable of offering passengers access to the world.
The airline has not been able to defend its territory in the costs leadership, as some other airlines are imitating it, for instance, Jet blue airline that is determined to attain cost leadership. Concentration on domestic flights has made it vulnerable to other airlines, like delta, which provide international flights.
Different unions have been formed by the airline employees, thus proving challenging to the management. The use of a single model of plane could limit its efforts to minimize on petrol consumption. The airline does not rely fully on booking agencies, as compared to other airlines, hence being at a disadvantage in regard to customers who prefer booking tickets through agencies.
However, the airline does not offer the services provided by other airlines like airport lounges, reserved seat assignments, video or audio programming and First Class cabin, and video/audio programming (Dan & Charisse, 2010). In addition, the airline has been easily imitated by other airlines, thus giving room for more competition. Southwest also relies on only one manufacturer of its plane, Boeing Manufactures.
Opportunities
The airline’s effort to acquire Air Tran is a gate pass to international flights, as longer flights will be introduced. The enhancement of internet booking services acts as a marketer for the airline once it starts operating abroad. In addition, the expansion of its operations to other cities increases its returns. The airline can further enrich its customer services with an aim of maintaining and retaining those customers. Moreover, the new advancing technology will yield to the airline offering new outstanding services to their customers.
Threats
Southwest Airline faces stiff competition from other airlines, for instance, Jet-blue, which rivals Southwest Airline on being the lowest cost provider in the industry (Box & Saxton, 2003 p4). Due to the recent oil decrease in oil prices, the airline is facing a major blow, since it saved millions when the fuel prices were high; however, it is forced to pay higher for the fuel, until the price rises.
Therefore, the airline’s operation cost is likely to increase; however, it faces a challenge of either increasing its fares or not making profit at all. In addition, its airplanes, like all the others airplanes, are prone to terrorist attacks, which could lead to many losses and lack of faith from its customers. Another threat that faces airlines is the risk of accidents; such cases tarnish the image of an airline, as most will imply the accident is caused by recklessness or pilot exhaustion due to long hours of flying.
Conclusion
The above SWOT analysis elaborates the factors behind Southwest Airline success and areas that could need improvements for the airline to continue enjoying a competitive advantage. Due to the continuing increase in fuel, the airline should minimize their costs, by avoiding any major investment, such as purchasing an airplane. However, the airline should continue focusing on its customers through quality services, in order to maintain and attract customers.
References
Dan, K. & Charisse, J. (2010) “Southwest will buy Air Tran in merger of low-cost rivals; USA today. Web.
Box, T. Saxton, S. (2003). Jet blue: a new challenger. Web.
